They have always been considered a safe option, he told attendees at PLANSPONSOR ‘s Plan Designs Conference in Chicago, with a fixed income structure as an investment alternative for participants.
align=”center”> The Panel Audio File
Whether that fixed income alternative consisted of private, public, or mortgage-backed funds, participants generally believe that, within stable value funds, nothing can really go wrong.
Steven Horner, SVP & Portfolio Manager at Putnam Investments, agreed with Woolhiser, recalling how many people consider stable value funds to be a kind of commodity product, and have the popular opinion that they do not require careful management or consideration.
He disagreed with this mentality, saying that stable value funds, like any other kind of fund, need diligent attention and maintenance.
Horner noted that over the past decade there has been a trend among stable value funds, moving from guaranteed investment or bank investment contracts, to having no guaranteed fund in their plan and becoming entirely synthetic.
He explained that with synthetics, managers are able to account for their portfolios at book value despite any fluctuations in the underlying market with interest rates and security returns. The manager can reset the crediting rate based on portfolio yield and duration and the market value experience of the underlying portfolio-the rate goes up after a good quarter, down after a less successful one.
Horner offered his support for diversified strategies and encouraged plan sponsors to allow for guaranteed investment contracts.
"Risk-based and some target-maturity/age-based funds are here to stay," said Woolhiser.
However, both he and Horner agreed that stable value funds can still be valuable in certain plans. Horner admitted that over a longer time horizon, most participants would profit from a target-date fund that might give them a better return over time. He also advocated educating participants about the benefits of newer qualified default investment alternative (QDIA) options, but said that for especially risk-averse participants, even the most conservative target-date funds can be too aggressive.
According to Horner, the "industry will move toward including [stable value funds] as part of a conservative target-date fund," and that within these improved alternatives, they "will become either part of, or the fixed income component of, target-based funds."
He referenced a Harvard study that showed that the addition of stable value funds to a diversified portfolio can improve the efficiency and profitability of that portfolio.
Woolhiser cautioned plan sponsors to be aware of the variations within stable value options, namely, general and separate accounts.
General accounts can be expensive and difficult to manage, while separate account products are generally an easier, less expensive and more attractive option. Horner added that in a general account, there is a high level of risk associated with having all assets in one place.
If a company had any financial difficulties, a fiduciary could not argue that employing a general account was a prudent decision.
Woolhiser also recommended researching how diversified a fund is-what kind of investments it has, whether there are public bonds, private placements, or mortgage bonds-the quality of the portfolio, and its net yield. Horner agreed that taking a conservative and diversified approach would likely be advantageous.
Both speakers conceded that a plan or participant that depends entirely on stable value funds is not as likely as one that utilizes target-date funds, to reach retirement successfully and well prepared. However, they feel stable value funds have evolved since their inception, and while they might not be the ideal retirement option, they have found their place among the QDIAs that will dominate the market in the years to come.
- Sara Kelly